What is Customs Clearance?
Customs clearance is a legal and formal documentation process for allowing import and export of goods. In other words, it is a documented permission that the customs authority of a nation grants for import goods so they can enter into the country or for export goods so that they can move across the border.
No good is traded across international borders without obtaining customs clearance. Customs clearance ensures that the trade taking place is legal, the required duties have been paid, and the trade policies of the country are not being violated.
Table of Content
- 1 What is Customs Clearance?
- 2 Meaning of Customs Clearance
- 3 Objectives of Customs Clearance
- 4 Customs Clearance Procedures for Imported Goods
- 4.1 Arrival of Goods
- 4.2 Filing of the Bill of Entry (B/E)
- 4.3 Selection of Customs Brokers (Erstwhile Customs House Agent (CHA)) in Import Clearance
- 4.4 Noting of the Bill of Entry
- 4.5 Presentation of the B/E for Appraisal
- 4.6 Payment of Duty
- 4.7 Physical Examination
- 4.8 Release of the Order
- 4.9 Confiscation of Goods
- 5 Port of Entry, Destination Port, and Ports of Clearance
- 6 Import General Manifest
- 7 Types and Levy of Customs Duties
- 8 Valuation of Goods
- 9 Bill of Entry
- 10 Permissibility of Import and Verification of Import Licence
- 11 CBEC: A Prime Customs Authority of India
- 12 Indian Customs Seizes 40 Gold Bars Worth ₹10 Million
- 13 Gold Import Licence Norms May Be Tightened
In addition, it aims at restricting various illegal activities, such as smuggling of goods and dumping. A shipping agent or customs housing agent is generally responsible for carrying out the customs clearance procedure. The agent ensures that all applicable customs duties are paid and the shipment is approved.This chapter focuses on various activities, documents, authorities, and processes involved in custom clearance of import goods.
Meaning of Customs Clearance
Goods cannot be imported to or exported from a country without getting clearance from the designated customs authorities.Customs clearance refers to a formal documenting process for the movement of goods from one country to other or into the country from another country. Customs clearance is granted by the customs authority of a country.
Therefore, in simple words, customs clearance can be defined as a permission given by customs authorities to import or export goods after verifying that:
- Goods are tradable.
- The import and export duties have been paid.
- All the required documents have been presented.
- The trade does not violate the EXIM policy of the country
Every country has a designated custom department to carry out the customs clearance process. In India, both manual and automated clearance systems are present. All the major ports have Indian Customs EDI system (ICES) access. However, at many ports manual clearance is in place.
Objectives of Customs Clearance
The main objective of the customs clearance process is to facilitate a smooth and efficient transfer of goods from one country to another. Apart, the other objectives of customs clearance are to:
- Achieve economic objectives through international trade
- Comply with the export and export policies of a country
- Curb activities, such as smuggling and dumping through proper monitoring
- Generate revenue for a country
- Facilitate the trading of goods between countries
- Increase co-operation between the customs authorities of different countries
- Facilitate in smooth and timely clearance of trade goods
- Harmonise customs procedures in accordance with international standards
Customs Clearance Procedures for Imported Goods
Till now, you have studied that customs clearance is mandatory for both the import and export of goods. In this chapter, the customs clearance procedure for imported goods is discussed in detail.
Customs clearance for imported goods is a systematic process that involves various stages. These stages are explained in detail as follows:
Arrival of Goods
Within 24 hours from the time of entry of the imported goods, the person in-charge of the ship/aircraft has to submit a document called Import General Manifest (IGM) to the concerned customs official. IGM is a document that mustbe submitted only in the prescribed format. It is basically a list of all the items that the container is carrying to deliver at the destination port. A detailed explanation on IGM is given in the subsequent section.
IGM can be submitted even after 24 hours after the arrival of import goods in case there are valid reasons for the delay. The imported goods are then transferred to the customs warehouse which is located near the port of discharge. The airline (or the shipping agent) sends the Cargo Arrival Notice as well as the details of the consignment to the importer.
Filing of the Bill of Entry (B/E)
It is a document filed by the importer/exporter providing information on the exact nature, quantity, and the value of goods to be traded. Thus, B/E is an important document for obtaining customs clearance as it declares the particulars of goods on the basis of which clearance is given. To speed up the import process, B/E may be filed 30 days prior to the arrival of imported goods. A detailed explanation on B/E has been given in the subsequent sections.
Selection of Customs Brokers (Erstwhile Customs House Agent (CHA)) in Import Clearance
It is an agency/organisation that is hired by an importer after paying a particular amount of fee. This agency/organisation provides assistance in customs clearance to the importer. The importer can complete the formalities of the customs clearing process himself before taking the final delivery of goods.
However, it is always preferable to outsource such processes to a CB (CHA). A CB (CHA) prepares necessary check list on line and gets the bill of entry processed in the customs thru EDI system. Bill of entry is prepared manually wherever EDI system is not available. EDI system calculates the customs duty which prevails on the date of filing Bill of Entry.
Noting of the Bill of Entry
When the goods arrive, the B/E is presented to the Import Noting Department for recordkeeping. It must be ensured that the B/E is complete in all respects and declarations are signed by the importer along with the customs agent. Also, the B/E is to be checked against the IGM by the noting officer. The declaration used for this purpose is as follows:
“We wish to clear the goods on arrival of the vessel. We request that our Bill of Entry be processed without waiting for the manifest. The vessel is due on (date). We shall formally present the Bill of Entry for noting as soon as the Import Manifest is filed.
In case the Steamer Agent fails to deliver the IGM to the Import Department within 30 days from the date of advance noting of Bill of Entry, or the goods in question are not found to be listed in the import manifest we shall surrender advance noted bill of entry to the Import Department for cancellation and shall present fresh Bill of Entry u/ s 46 of the Customs Act, 1962 after the delivery of Import Manifest in the Custom House.”
Presentation of the B/E for Appraisal
After the B/E has been noted by the Import Noting Department, it has to be presented to the appraising group for appraisal.
At this stage, few other documents are also required, which are:
- Copy of letter of credit wherever applicable
- Commercial invoice (bank attestation not necessary for regular clearance)
- Import license wherever applicable
- Bill of lading (B/L) or the airway bill plus the delivery order from the carrier
- Two copies of packing list
- Certificate of insurance
- Certificate of origin
- Certificate of freight and insurance (if Free on Board (FOB) is applicable)
- Importer Exporter Code (IEC) number
- Test certificate of the manufacturer wherever applicable
- Importer’s declaration stating that no commission was paid to the agents
- Customs declaration
- Catalogues of the imported machinery
- Properly filled General Agreement on Tariffs and Trade (GATT) form
- Declaration in accordance with the EXIM policy if second-hand machinery is imported
- Other documents (if required)
The importer has to declare that he has provided all the correct information in all documents. This is done by signing the B/E declaration. Any wrong declaration may have serious legal or monetary repercussions. After the documents have been submitted, they are examined by an appraising officer. If the officer finds that the B/E can be accepted, the applicable duty is noted on the B/E. At the end, the assistant commissioner of customs has to countersign it.
Payment of Duty
After the appraisal of the documents, the B/E is given to the importer for submitting the applicable duty. After the duty is paid, all the documents are returned to the importer barring the original B/E.
After the duty has been paid, the importer approaches the dock appraiser for the physical examination of goods. Here, the dock appraiser first checks and verifies all the documents and afterwards he carries out the physical examination of the goods. Such examination is called the second check procedure and most of the goods are cleared after going through this procedure.The dock appraiser gives an ‘out of charge’ order if the goods are found to be proper.
In case the dock appraiser is not able to check the goods or the full details of the goods are not present after the second check procedure, he sends all the documents to the dock superintendent for physical examination. This process is called the first check procedure.
Here, it should be noted that the first check is carried out only under two conditions. In the first case, if it is done on the request of the importer, while in the second case, if the dock appraiser finds it necessary to carry out the physical examination of the import goods again. After the physical examination at this stage, the B/E is returned to the appraiser.
Release of the Order
The goods are taken out and given to the importer only after the port manager gives a release order. The port manager has to ensure that the importer or his clearing agent has paid the charges (if any).
Confiscation of Goods
If the goods that have been imported are found to be prohibited goods or if the entire import process violates any provision of the Customs Act, the goods can be confiscated. The concerned authority may take a decision to return goods by taking some fine or confiscate them.
Port of Entry, Destination Port, and Ports of Clearance
There are certain terms used in the context of customs clearance, which appear to be quite confusing. These terms are explained as follows:
Port of Entry
A country may have a large border through which the movement of individuals and goods can take place. However, every country has only a few designated and authorised points of entry through which the movement of individuals and goods can take place. A port may be an airport or a shipping port or a designated point of entry by road.
A destination port is a port where individuals or imported goods are to be finally shipped. The individuals and goods can enter the country through any port and then move to its destination port.
Port of Clearance
The port of clearance refers to the port from where imported goods are cleared and taken by the importer. A port of clearance may or may not be the port of entry or the destination port in case the goods are unloaded and stored at a warehouse of customs. Mumbai Port, Jawaharlal Nehru Port (formerly known as Nhava Sheva port), Kandla Port, Marmagao Port, and Kolkata-Haldia Port are some of the largest ports of clearance in India.
Import General Manifest
Import General Manifest (IGM) is a document that has to be filed at the destination port before the carrier arrives with imported goods. It contains information regarding the imported goods such as the carrier details, consignee name and address, packages details (number, description), airway bill number/bill of lading (B/L) number,etc.IGM has to be filed by the goods carrier or by his agent. IGM is filed based on the airway bill or the B/L.
After filing IGM with the destination port, the importer has to carry on import documentation with customs. In case there is any error has been made in filing IGM, customs authorities do not accept import documents. Such documents must be amended before they can be again filed with the customs for clearance.
Types and Levy of Customs Duties
As discussed in the previous chapters, customs duty is a type of indirect tax that the government of a country imposes on goods that are imported or exported. This tax is levied under two conditions: import into the country and export out of the country.
The importance of customs duties is explained in the following points:
- Customs duty helps in controlling and managing the flow of goods into a country and from the country; thereby increasing revenue and improving the economic scenario of the country.
- Customs duty is also used as a mechanism to restrict import to conserve the foreign reserve of the country and protect domestic industries from unfair competition.
- Customs duty is also used to regulate exports.
- Customs duty is also used to prevent the trade of restricted or banned goods and prevent smuggling.
Customs duty is broadly categorised as import duty and export duty. However, a detailed classification of the customs duty is as follows:
Basic Customs Duty
Under Customs Act, 1962, a particular rate of import duty is charged for all imported goods. However, there is no one fixed rate of duty that is applicable to all the imported items. The imported items have been categorised into various divisions and sub-divisions and the duty rate applicable is decided on the basis of the type of item. The rate of duty applicable can be on the basis of the value of the imported goods (ad-valorem basis) or specific rate for a particular category. The duty rates may be revised or withdrawn as per the orders given by the central government.
Additional Customs Duty
It is also known as the countervailing duty. The rate of the countervailing duty is equal to the central excise duty that is levied under the condition if the similar goods (to import goods) are also manufactured in India. Here, it should be noted that the countervailing duty is applicable only if similar products are produced in India and their process of production falls under the category of ‘manufacture’ as per the Central Excise Act of 1944.
If the similar goods are exempted from excise duty in India, the imported goods are also exempted from the countervailing duty. The countervailing duty is calculated on the sum of assessable value and basic customs duty.
In some cases, the goods are covered under the Standards of Weights and Measures Act, 1976 (An Act to establish standards of weights and measures, to regulate trade or commerce in weights, measures and other goods which are sold or distributed by weight, measure or number, to provide for matters connected therewith or incidental thereto.) For such cases, the duty is calculated based on the amount obtained after deducting the rebate (as per Central Excise Act,1944) from the retail sale price of such goods.
Additional Duty of Customs
It is also called the true countervailing duty. It is a duty that is levied so as to provide equal opportunity to domestic producers. The domestic producers have to face various internal taxes and at times there may be high excise duty on the inputs of production. Here, the additional duty is calculated based on the amount obtained after deducting the rebate (as per Central Excise Act, 1944) from the retail sale price of such goods.
Under Customs Act, 1962, a particular rate of export duty should be charged for goods (subject to certain exemptions) exported from India. The Customs Tariff Act, 1975describes the goods on which the export duty is applicable along with the rate of export duty. The Customs Tariff Act, 1975 is revised from time to time. The central government has the authority to revise the applicable rates or may even impose new export duties.
At times, large international players may sell their products in other markets in order to damage the domestic industry of that country or dump their excess produce. Therefore, in order to counter this type of situation, the government may impose anti-dumping duties on such items. The WTO agreement permits the use of anti-dumping duties.
It is a duty that can be levied by the central government on some specific goods if the government feels that such goods are being imported in a large amount and are a potential threat to the domestic producers of similar goods. The WTO agreement permits the use of safeguard duty.
The safeguard duty is applicable for a particular time period only. It is a measure to provide protection to the domestic industry only when a need for such protection arises. After the time period expires, the safeguard duty must be taken back so as to restore fair and free market for domestic and international producers.
Valuation of Goods
The value of imported goods has to be derived in order to know the value of the applicable dutyin case the duty is levied on an ad-valorem basis (amount of duty that is based on the value of imported goods). In India, to determine the value of goods, the WTO Agreement on Customs Valuation (ACV) is followed since August 1988. The Agreement on Customs Valuation was developed in the GATT negotiations which took place in Tokyo (1973-79).
As per Section 2(41) of the Customs Act, 1962,value is defined as the price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation or exportation, as the case may be, in the course of international trade, where the seller and the buyer have no interest in the business of each other and the price is the sole consideration for the sale or offer for sale.
According to Sub-section (1) of Section 14 of the Customs Act, 1962, the duty applicable to a good is based on the value of that good. It is applicable for both imported goods and exported items. The valuation of the goods is based on the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 describe six methods of valuation that are based on ACV.
One such widely used method is the transaction value method. In case, the transaction value method is not applicable, other five methods are applied in a hierarchical manner. The transaction value method is applied after adjusting for certain factors. For valuation, it is important that all the details of the importgoods have been given and are accurate. Let us now discuss the transaction value method.
Customs Valuation Rules, 1988 defines transaction value as the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9. The rule also states that the price paid or payable must be adjusted for dutiable valuation factors if they have not been included in the invoice value. Also, the invoice value must be adjusted so as to include freight, insurance, and handling charges.
Dutiable factors include commissions, broker age, cost of packaging, material components, advance payments, insurance, freight charges, loading, unloading and handling charges, etc. The dutiable factors must be included in the transaction value to the extent they are not included in the price already paid. Non-dutiable factors include duties and taxes payable in India, post-importation charges, etc. These factors are not included for determining the value of goods.
Let us now discuss the other five methods of valuation.
- The Transaction Value of Identical Goods (Rule 5) method states that the value of goods is determined on the basis of the transaction value of identical goods that were imported about the same time.
- The Transaction Value of Similar Goods (Rule 6) method states that the value of goods is determined on the basis of the transaction value of similar goods that were imported about the same time.
- Under the Deductive Value Method (Rule 7), the value of goods is calculated by deducting the selling expenses, margin of profit, duties, and taxes from the selling price of imported goods in India.
- Under the Computed Value Method (Rule 7 A), the value of goods is calculated based on the cost of materials used in production of imported goods, cost of fabrication or other processing charges at the country of production, profit and general expenses, and other dutiable factors.
- Under the Fallback Method (Rule 8), all the above mentioned methods may be applied but only with strict adherence with the section 14(1) of the Customs Act.
Bill of Entry
As mentioned earlier, B/E is the most important document for obtaining customs clearance and filed 30 days prior to the arrival of import goods.
The B/E contains various details, which are:
- Importer’s name and address, IEC (Importer-Exporter Code) number, CHA (Customs House Agent) code, destination port, origin of goods
- Vessel name
- Number, quantity, packages of imported goods
- Value of goods
- Details of imported goods
- Exporter name and address
- Currency, weight of goods
- Freight and insurance
- Importer’s license number
- Rate and amount of applicable duty
The B/E is divided into four types, which are as follows:
Bill of Entry for Home Consumption
It is a white coloured B/E. This type of B/E is submitted when a full duty is paid for import goods and the goods are for consumption in India. Figure shows the format of B/E for home consumption:
B/E for Warehouses
It is a yellow coloured B/E, which is submitted when the imported goods are stored in the customs warehouse and no duty is paid for such goods. They are stored in the warehouses temporarily under a bond and can be cleared after the duty is paid.
B/E for Ex-bond Clearance
It is a green coloured B/E and is submitted when the importer wants to get the imported items from the customs warehouse on the payment of duty.
Figure shows the format of bill of entry for ex-bond clearance:
B/E for Defence Establishments
It is a pink coloured B/E and is used for goods that are imported for defence establishments.
Permissibility of Import and Verification of Import Licence
For importing goods in India, traders require an import license. However, individuals who are not traders can also import some items for their own consumption. Such individuals do not need a license. According to the harmonised system of classification, the goods are classified into three categories namely restricted items, canalised items, and prohibited items. The goods that are not included in any of these categories are freely importable items. Such items can be imported without any import license or permission.
However, a trader must have a valid IEC. These three categories of goods are explained in detail as follows:
These are goods for which a trader needs to obtain an import license that is issued by the regional licensing authority. The license indicates a manner in which the goods (as mentioned in the license) should be disposed (sold or damaged). An import license is valid for 24 months for capital goods and for 18 months for other goods. The items which are listed under the restricted category of the HS classification can be imported only if there is a valid license or permission for the same. Examples of restricted goods include horses, bulls, potatoes, etc.
The canalised goods are listed under the HS classification. For importing canalised items, a specific method of transport has to be adopted. Only canalising agencies (agencies designated by the central government) can import such goods. Canalised items include petroleum products, pharmaceutical products, etc.
Some goods such as wild animals, tallow fat, oils of animal origin, unprocessed ivory, etc. fall under the category of prohibited items. These goods cannot be imported to India.
Apart from freely importable items, for all other items it is important that an importer obtains an import license. This license is verified at the time of import clearance.
In India, the customs authority is the Central Board of Excise and Customs (CBEC). CBEC is a board that works under the Department of Revenue, Ministry of Finance, the Government of India. Major work areas of CBEC are:
- Policy formulation
- Levy and collection of customs, central excise duties, and service tax
- Prevention of smuggling
- Administration of the subordinate organisations such as Customs Houses, Central Excise and Service Tax Commission Rates, and the Central Revenues Control Laboratory.
Indian Customs Seizes 40 Gold Bars Worth ₹10 Million
NEW DELHI, 16th February, 2015: Customs authorities detained two smugglers at the Mumbai International Airport and seized 40 gold bars worth ₹10.52 million. The airport customs authorities reported that a passenger named Kiran Chaudhari handed over the consignment to Rohan Surve after landing in the airport. The officials also reported that Surve was stopped at the custom clearance checkpoint when the officials found he was hiding gold in a vehicle battery-shaped box kept in a bag containing airmail.
A search by customs officers revealed 32 gold bars, totally weighing 4.8 kg. Chaudhari was found waiting outside the terminal building. The Commissioner of Customs (Airport), APS Suri, said, “Initially, our team recovered 32 gold bars. Another eight bars were recovered from the coat pockets of the accused, Surve. Each of these bars weighed 152 gm. and had foreign markings.”
Gold Import Licence Norms May Be Tightened
The Ministry of Finance, in consultation with the Reserve Bank of India (RBI), reviews the norms of granting licences for gold import. This measure is being considered to keep gold import limited to the actual users for making jewellery or for other uses and to cut down import for investment and trading purposes.
According to an official privy to the development, “What is adding to worry of actual demand for gold is the speculative trading on gold which is not only triggering high prices but easy profits through investments. The retail already has substantial gold investments”. Some officials are of the opinion that gold import licences should only be given to state trading corporations and actual refiners.